The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

Facebook CEO Mark Zuckerberg (Photo: Guillaume Paumier)

Updated with comment from Facebook ad firms:

Mobile advertising continues to drive 's revenue growth, as ads on smartphones and tablets grew to 30% of revenues in the first quarter, up from 23% in the fourth quarter.

But the social network's rapid expansion of its workforce and computing infrastructure to expand the business--and especially to meet the challenge of reaching people on smartphones and tablets--kept profits below Wall Street expectations. Operating margins fell by 6 percentage points from a year ago.

In addition, mobile ads generally bring in lower prices than desktop ads. It's not entirely clear to what extent mobile ads cannibalize conventional ones. But the difference between the percentage of overall users accessing Facebook from a mobile device--68%--stands in stark contrast to the 30% of overall revenue coming from mobile ads.

Facebook doesn't break out how much revenue each kind of ad brings in. But Facebook ad firms say the big star of the mobile ads is mobile app install ads. "These installs have made Facebook one of the biggest mobile ad suppliers in the world and are really what’s driving mobile revenue," Krishna Subramanian, chief marketing officer for mobile ad firm Velti, said in a email.

Overall, Facebook's revenues jumped 38% from a year ago, to $1.46 billion, but profits rose only 9%, to $219 million, or 12 cents a share, before stock compensation and other costs. That's a penny under analysts' forecasts. Shares, which fell a little over 1% before the announcement today, were up a fraction of 1% to a little over 1% in early after-hours trading, though shares will be volatile until we hear more.

One Facebook ad company saw little to worry about in the results. Facebook's continued growth in usage shows that it's "even more entrenched in people's live than before," says David Berkowitz, VP of emerging media at the digital agency 360i. Brands are finding Facebook mobile ads useful for driving people to stores, he says, and its advertising exchange, known commonly as FBX, is also appealing to direct marketers. "Facebook is throwing out a lot of ad products that meet advertisers' needs," he says.

Forbes writer Tomio Geronliveblogged the analyst call, which you can also listen to on Facebook's investor relations site. Following are highlights mainly on the advertising front, in particular CEO Mark Zuckerberg's and COO Sheryl Sandberg's assessments of the ad business. After the call highlights, I've pasted in ad highlights provided by Facebook:

Zuckerberg started off the call to talk about Facebook's mobile efforts. Not surprisingly, he promoted Facebook Home, the new skin on top of a few select 's Android phones. Home, he said in a rerun of his comments at Home's recent launch, is "a completely new mobile experience based on people, not apps." Zuckerberg also pointed to even faster growth on Instagram, the mobile photo sharing service it bought last year for $740 million.

In particular, Zuckerberg said Facebook is seeing "real revenue" from app installation ads--especially on mobile devices.

Sandberg, the top business executive at Facebook, said ad revenue was up 43% in the first quarter, the highest ever.

In mobile, she said, the opportunity for Facebook is to offer advertisers massive reach. 3,800 developers used mobile app install ads to drive 25 million app installations. British Telecom, for instance, promoted its new music app on Facebook exclusively, quickly getting 9 million users.

Sandberg said measurement of ads' impact remains a key focus for Facebook. Bud Light, for instance, ran page post ads that yielded a 3.3% lift in sales, for a sixfold return on ad spend.

The Atlas acquisition from Microsoft just closed last week, she noted, and will offer Facebook a way to track the impact of all kinds of ads all the way to purchase.

Custom Audiences, which allows marketers to target people using their own (not just Facebook's) data, is popular, she said. More than twice as many marketers used the product in the first quarter over the fourth quarter.

More customers are using FBX as well, mainly for "retargeting" people, or reaching them on Facebook based on other sites they've recently visited, Sandberg said.

Ad impressions rose 39%, said CFO David Ebersman, and ad prices were up 3%--which doesn't seem too bad given that most of the ad inventory is being shown on mobile.

A few key ad-related questions and answers in the Q&A part of the call:

Q: What are the most exciting ad products coming up for 2013?

Sandberg: We're particularly focused on increasing the quality of our ads through things like Custom Audiences and FBX. (Well, not very specific there.) Zuckerberg: Quality is key--through making them personalized more than anything. The news feed redesign, with more visual content, also will make ads more visual and thus more compelling.